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The Wall Street Journal: Russia Cancels Royal Dutch Shell PLC Permit, May Seek Better Deal

By GREG WALTERS
September 19, 2006; Page A17

MOSCOW — Russia’s Ministry of Natural Resources said it would cancel an environmental permit for a $20 billion oil and natural-gas project led by Royal Dutch Shell PLC on the Far East island of Sakhalin.

The move was seen by Western observers as a negotiating tactic aimed at restructuring terms of the agreement. It follows efforts by the Kremlin to increase Russian control of oil and natural-gas projects.

Shell and Sakhalin Energy Ltd. — the project’s operator, which is 55%-owned by Shell — said there wasn’t any legitimate basis for canceling the permit and such a move “could be damaging for the project and for Russia and lead to delays.”

A ministry spokesman said the decision may be only temporary and the license could be reinstated within six months.

Japan’s Mitsui & Co. and Mitsubishi Corp., which are also shareholders in Sakhalin Energy, weren’t available to comment.

Separately, Russian officials also warned that the ecological and technical readiness of Exxon Mobil Corp.’s oil-export terminal on the Pacific doesn’t comply with environmental regulations.

Exxon Mobil declined to comment on whether that would mean postponing the Oct. 4 launch of the terminal.

“We do believe that contract sanctity is important, and we hope to resolve these issues amicably,” said Mark Albers, president of Exxon Mobil Development Co.

The two Sakhalin projects are being developed by Western oil companies under production-sharing agreements signed during the 1990s, when oil prices were lower and when Russia was in greater need of foreign capital to develop its energy reserves. A third agreement was granted to Total SA, of France, to develop the Kharyaga oil field in the Nenets region, north of the Arctic Circle.

Under the deals, the oil companies win tax breaks, while the government gets a share of the oil and gas once the project’s production costs have been covered.

As prices have surged in recent years, Russia, like many other oil-producing countries, has shifted its approach to give precedence to local companies — primarily state-controlled giants OAO Gazprom and OAO Rosneft — relegating foreign companies to junior-partner roles.

Yesterday’s announcement raised questions from many observers about how far the standoff between Russia and the international oil majors might escalate. Analysts said Russia may be raising the pressure as a means of reordering the agreements to the country’s benefit.

Russia’s minister of natural resources, Yuri Trutnev, said last week that enhanced environmental scrutiny of Sakhalin Energy is part of Russia’s efforts “to defend its interests” after Shell said the cost of the project would nearly double to $20 billion, meaning Russia would have to wait longer to see its share in the profits.

Sakhalin-2 is the only major oil and natural-gas project in the country in which a Russian company doesn’t have a stake, although Shell is in talks with Gazprom on swapping part of Sakhalin Energy for a stake in another gas field in Russia called Zapolyarnoye.

Analysts said Shell’s regulatory troubles are likely to strengthen Gazprom’s hand in those talks, although officials deny any connection between the two.

— Benoit Faucon, Leia Parker, Sally Jones and Alex MacDonald contributed to this article.

Write to Greg Walters at [email protected]

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